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New Ministerial Decision on Determination of Tax Residency

Ministerial Decision No. 27 of 2023 on Implementation of Certain Provisions of Cabinet Decision No. 85 of 2022 on Determination of Tax Residency.

Below is a summary of the key changes:

  • Simplified and standardized criteria for determining tax residency, which is based on an analysis of each taxpayer’s facts and circumstances.

  • Elimination of the requirement to obtain approval from a tax advisor prior to applying the new ministerial decision.

  • Expansion of the list of countries with a tax treaty or double tax agreement with Luxembourg that do not have a principal place of business to which the treaty or agreement applies, thus reducing the number of countries that could be considered as an investor residence country.

What is the New Ministerial Decision?

The new Ministerial Decision in the UAE is Cabinet Resolution No. 85 of 2022, which provides guidelines for determining tax residency for both natural and legal persons. The new criteria for tax residency have been broadened, and the Decision is effective from March 1, 2023. Prior to this, there was no statutory definition that applied to the process of applying for a Tax Residency Certificate.

According to the new Decision, for legal persons to be considered tax residents, they must be incorporated, formed, or recognized under UAE laws. However, foreign branch offices are excluded. Individuals and entities must also provide documentary evidence to prove they have been tax residents for at least one year. This new Ministerial Decision is crucial for individuals and businesses to understand to ensure compliance with tax residency requirements in the UAE.

Who does the New Ministerial Decision affect?

The New Ministerial Decision on the Determination of Tax Residency affects individuals and businesses alike. The decision outlines the criteria for determining an individual's tax residency status and eligibility for tax exemptions. The scope of the decision is not limited to local residents but extends to expatriates as well. Some key changes include the inclusion of new tests for tax residency and the annulment of previous decisions.

The implications for businesses include the need to comply with the new decision and adjust their tax policies accordingly. They must also ensure that they document their employees' tax residency status and implement the required changes to their payroll systems. Companies may face penalties if they fail to comply with the new decision, which can have financial repercussions. To ensure compliance, businesses can seek professional advice, review their tax reporting systems, and train their employees on the new requirements.

The Criteria used in Determining Tax Residency

The new Ministerial Decision on the Determination of Tax Residency broadens the criteria for determining tax residency in the UAE. Natural persons conducting business in the country and companies established under UAE or foreign jurisdiction that are effectively managed and controlled in the UAE can now be considered residents for corporate tax purposes.

The physical presence requirement of 183 days no longer applies. Instead, international agreements such as tax treaties will continue to play an important role in determining tax residency. To obtain a tax residency certificate, individuals can request it from the Federal Tax Authority, which declares their eligibility for tax relief or benefits in another jurisdiction affected by the relevant tax treaty.

Overview of Tax Residency

The UAE has introduced a new Ministerial Decision on the determination of tax residency in the country. The decision expands the criteria for natural and legal persons to be considered tax residents. Under the new rules, conducting business in the UAE can now establish tax residency for natural persons. The definition of UAE tax residency has been brought in line with international best practices. The Ministry of Finance has issued Ministerial Decision No.27 to provide additional guidance on determining tax residency for natural persons. In addition, the Cabinet retains the power to declare any person not covered by the Corporate Tax regime as a resident for tax purposes. The Decision aims to provide clarity and certainty for taxpayers in the UAE while ensuring compliance with international standards.

Expert Analysis of the Change

The UAE has recently issued guidelines for determining tax residency for natural and legal persons, with a new Cabinet Decision set to take effect from 1 March 2023. This decision aims to provide clarity on tax residency rules and will impact individuals and businesses in the UAE.

According to expert analysis, this decision may require changes in tax planning and reporting for those affected by the new guidelines. It is important to note that the decision is not retroactive, but it is recommended that individuals and businesses review their tax residency status and ensure they are compliant with the new regulations.

Overall, this new ministerial decision reflects the UAE's commitment to maintaining transparency and promoting the country's business-friendly environment. It is advisable for those potentially impacted by the decision to seek professional advice and take steps to ensure compliance with the new guidelines.

Conclusion

The new ministerial decision is a welcome addition to the tax residency determination process. While it implements a number of existing laws, the decision provides clarity on tax residency and safeguards the interests of various parties. It also ensures that tax residence is clearly defined while taking into account changes in the business environment and technological advancements. This decision will help establish a more predictable, transparent, and fair tax residency determination process while strengthening the legal basis of taxation. The decision is also expected to reduce instances of double taxation and tax evasion. If you have any concerns regarding the new tax residency rules, feel free to contact GAAP Associates.

Tax Residency Certificate

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